Production question marks continue to bring buyers in the grain sector particularly for corn and soy. Downward revisions continue to enter in the market regarding South America amid a La Nina that brings heat and no rain in many production areas especially in Argentina. Futures today stopped short of penetrating Monday’s high.The combination of fresh money flow, strong Chinese buying, South American weather threats and tightening stocks at home and around the world have fueled frenzied buying in corn and other ag commodities to close 2020 and open 2021. Strong rallies in the soybean, wheat and crude oil markets added to bullish optimism today. In my view the market fully expects USDA to trim its U.S. and global corn ending stocks projections on Jan. 12. The question is will they? The USDA can always throw a curve ball vs expectations into these reports and next Tuesdays report maybe no different. For example last January’s report had the agency increase on farm stocks citing less of a disappearance from two crop seasons prior which induced a lot of head scratching from analysts and the trade itself. Managed funds are long approximately 309K contracts per CFTC data as of December 29th. In the four trading sessions since then the market has rallied 30 cents in Corn, so the net long in managed money might be close to plus 350K in my opinion. The record managed money long in corn per CFTC data is 419K. If one is looking for some downside exposure in corn into the report, I would bypass futures or spreads for now and simply buy cheap out of the money puts. I would mitigate the risk as much as possible for a few reasons. First, China’s energy watchdog last week said oil and gas companies should restore supply of ethanol-blended gasoline as soon as possible, after learning some had stopped selling the fuel. Secondly, Argentine port workers are back to work, but ship backlog will take weeks to work through. In addition, farm workers announced a strike today protesting last weeks’ suspension of export licenses. Argentine labor disruptions will likely be a market factor for the foreseeable future. Lastly, Argentina’s recent suspension of corn exports until March 1 could result in lower production. In the past, such government intervention resulted in farmers moving away from corn and toward soybean production, and Argentina’s latest action could mean that farmers there won’t plant all of their intended corn acres. In northern Argentina, less than 10% of the corn crop has been planted and the planting window is closing in two to three weeks. In my view the market will remain in a buy the dips mentality in the near term until more is known about South American production and the USDAs carry-out number and production from last year along with any adjustments to prior year’s production. If one is looking for a downside idea for a report day trade please consider the following idea.
Options-Buy the February 21 475 put for 6 cents OB. The options expire on 1.22, 10 days after the crop report. The market has rallied over 1.00 from the November lows. It’s a massive move for corn in that amount of time but in my view its warranted on a few fronts. However, with the massive managed money long and the importance of this report, some profit taking maybe seen.
Options-If one is filled at 6 cents on the Feb 475 put, the cost and risk is $300.00 plus commissions and fees. I have plenty of ideas using futures, futures spreads and different option strategies to potentially catch another leg higher or a retracement of this current rally.
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